Early Stage Innovation Company Capital Raising

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Welcome to this update on ESS BIZTOOLS ADVISORY SERVICES NEWS.

EARLY STAGE INNOVATION COMPANY CAPITAL RAISING

Have you had an enquiry from a client or even a prospect about identifying funding to assist them in the development of a new product, process, service or marketing or organisational method?

If so, did you indicate to them that the Australian government, seven years ago introduced legislation which offered an “incentive to investors” who invested in a “young company” that was genuinely focused on developing for commercialisation one or more new or significantly improved products, processes, services or marketing or organisational methods?

This legislation is known as the “Early Stage Innovation Company Status” which was enacted by the Government making amendments to the Income Tax Act!

The incentives are approved by the Australian Taxation Office and relate to:

• A tax rebate calculated at 20% of the investment made by the Shareholder for the acquisition of ordinary shares at the time of the “test time determination” subject to the maximum rebate amount being:
  • for Sophisticated Investors – $200,000
  • for Retail Investors – $10,000
• If the Shareholder holds the shares issued as part of the “test time determination” for longer than twelve months and less than ten years, the shareholder is “not liable for Capital Gains Tax when those shares are sold”.
• If the Shareholder remains the owner of the shares after ten years, a company revaluation will be conducted to determine a new “cost price” for that investor on those shares for the purposes of future Capital Gains Tax calculation.

There is no direct taxation benefit to the company but what the Australian Government has enabled for many “young companies” is that the “incentives” encourage Investors to invest in companies which qualify for this status and the company receives the much-needed investment funds.

ESS BIZTOOLS has developed a step-by-step overview of the “Early Stage Innovation Company” process to assist Accountants to be able to answer questions and offer advice to clients who meet the guidelines and are interested in raising share capital for the company.

OVERVIEW:

In December 2015 the Australian Government responded to various reports that indicated that Australian Small Technology Companies were having significant difficulty in securing funding for their business operations as either share capital or loan funds.

The Government announced that it would introduce legislation to create a special type of company that an already incorporated company could “self assess” for or assemble supporting documentation and submit an application to the Australian Taxation Office for assessment and if passed the Australian Taxation Office would issue a certificate to that applicant company that it had achieved the status of being an “Early Stage Innovation Company”.

The reason that a company would undertake this process was that the legislation which was created by making amendments to the Taxation Act would include special taxation benefits for Investors who invested at the “test time” and who were investing on an arm’s length basis.

The Company’s Directors need to ensure that the company has prepared appropriate documentation and the due diligence reviews so that it either “self assesses” under the Gateway Test or successfully applies to the Australian Taxation Office for a ruling that the company has qualified as an “Early Stage Innovation Company” under the Principles Test.

The Directors and their advisers need to be diligent in the preparation of the Company’s Business Plan, Predictive Accounting Reports and General Due Diligence on matters relative to the company to attract the support of potential investors who need to be fully convinced that an acquisition of shares in the company will enable the investor to access the taxation benefits that are available for an arm’s length investor in a qualifying company for the status of an “Early Stage Innovation Company” and that the company has a reasonable chance for the operation of a successful business.

DUE DILIGENCE REVIEW – THE GATEWAY TEST:

Company Directors need to be diligent to ensure that the self-assessment process required by the Gateway Test has been conducted in a professional manner because it should be assumed that any potential investor will require details of the due diligence review that has been undertaken by the Company’s Directors for his/her personal review and probably review by their external advisors to ensure that the company has conducted the self-assessment process in an appropriate manner because an investor’s decision as to whether to invest in the company is going to be significantly influenced by the quality of the “self-assessment process”.

Under the Gateway Test the company is required to answer a series of questions for which the government has allocated eligibility points for documentary supporting evidence being available.

The company must achieve a score of at least 100 points to qualify as an Early-Stage Innovation Company under the Gateway Test.

The Company is not required to submit the supporting evidence to the Australian Taxation Office but must have that documentation available if a request is made by the Australian Taxation Office for the documentation to be produced at a later time.

DUE DILIGENCE REVIEW PREPARED UNDER THE PRINCIPLES TEST

The Company Directors can elect to submit answers to the five questions that are asked under the Principles Test.  There is no requirement for a company to first assess its eligibility under the Gateway Test.

The Australian Taxation Office in conjunction with AusIndustry (the Australian Government Agency that is responsible for Research and Development grant programs targeted at eligible businesses and other business enhancement programs) analyse the answers submitted to the Principles Test questions to determine whether the company qualifies as a company eligible to be deemed to be an Early Stage Innovation Company.

BAN ON ADVERTISING OR PROMOTION OF CAPITAL RAISING

The company is not able to market or promote to the public that it is seeking to raise capital.

EXPLANATION ON THE PROCESS TO BE DEEMED TO BE A “EARLY STAGE INNOVATION COMPANY”

A company is not incorporated as an “Early Stage Innovation Company” because this is a change that occurs within a specific time period that is influenced by other factors – turnover, expenditure, date of incorporation.

The company would normally be incorporated under section 708 of the Corporations Act and is therefore subject to the limitations contained within that section and the general private company limitation of not having more than fifty Shareholders.

An awareness of the Early Stage Innovation Company Process will benefit your clients and your firm.

There are thousands of small companies which are involved in innovative activities that could make them eligible for the Early Stage Innovation Company Status and in so doing gives them a tremendous operational advantage when they are raising capital.

By having an awareness of this very unique incentive made available by the Australian Government accountants will be seen as being “the trusted advisor” in assisting Company Directors to have an understanding of how this process operates.

But, there is more to this strategy than just showing a company how qualification can be achieved.  On its own the ability to qualify will not be enough to swing most investors’ reviews in favour of the company.  There will be a need for the preparation of realistic Business Plans, Predictive Accounting Reports – Budgets – Key Indicators – Cash Flow Projections – Projected Balance Sheets – Fund Statements and a level of preparation relating to corporate governance knowledge by Directors and the Leadership Team and a clear understanding of what the company’s vision is including a realistic exit strategy at least for the new investors.

This is interesting and challenging work that your Accounting Team could undertake on behalf of your client.

There is also a realistic opportunity that your firm could secure the appointment as the virtual Chief Financial Officer of this company.

The end result is that your client will be very impressed that you have knowledge of this legislation (that unfortunately many accountants do not have) and you have demonstrated that you are “The Trusted Advisor” to your client.

Your accounting team members will be very happy because this is a great opportunity to secure “interesting and challenging work” which will assist your firm to “attract and retain talent”.

You can find more information on the Early Stage Innovation Company Product Package developed by ESS BIZTOOLS by accessing www.essbiztools.com.au

ESS BIZTOOLS includes these products and more in the four product packages that are available for subscribers.  You can explore the offerings at www.essbiztools.com.au

These product packages and training programs assist Accountants and Bookkeepers to deliver effective Advisory Services to SME clients.

If you would like a one-on-one complimentary review Zoom meeting with our Founder and Managing Director, Peter Towers please email us at